Fiscal policy is a crucial component of a government’s economic management strategy. It involves the use of government spending and taxation to influence and stabilize the economy.
MCQs on Fiscal Policy Practice Now
Here are some key points to note about fiscal policy:
- Economic Stabilization: Fiscal policy is used to stabilize the economy during periods of recession or inflation. During a recession, the government typically increases its spending and decreases taxes to boost economic activity. In contrast, during inflation, the government may reduce spending and increase taxes to cool down the economy.
- Government Revenue: The government can raise revenue through taxes on individuals, businesses, and imports. These revenues are used to fund public services such as education, healthcare, defense, and infrastructure development.
- Budgetary Tools: Fiscal policy involves two main tools: fiscal expansion and fiscal contraction. Fiscal expansion involves increasing government spending and/or decreasing taxes, while fiscal contraction involves reducing spending and/or increasing taxes.
- Budget Deficits and Surpluses: When government spending exceeds revenue, it results in a budget deficit. Conversely, when revenue exceeds spending, a budget surplus occurs. The government can use deficits as a short-term economic stimulus, but they should ideally be offset by surpluses during stronger economic periods.
- Long-term Goals: Fiscal policy is not only about short-term economic management but also about achieving long-term economic goals. This can include maintaining a sustainable level of government debt, investing in infrastructure, and promoting economic growth.
- Political Considerations: Fiscal policy decisions are often influenced by political considerations, as they can be contentious. Governments must balance the need for economic stability with their political objectives.
- Debt Management: Managing government debt is an important aspect of fiscal policy. Governments need to ensure that their debt remains at a sustainable level relative to their GDP and revenue. High levels of debt can lead to financial instability.
- Cyclical vs. Structural: Fiscal policy can address both cyclical and structural issues. Cyclical policies are designed to counteract economic fluctuations, while structural policies aim to address long-term issues, such as income inequality, education, and healthcare reform.
- Global Implications: Fiscal policies can have an impact beyond a country’s borders, especially in an interconnected global economy. For example, currency exchange rates and trade balances can be influenced by a nation’s fiscal policies.
- Countercyclical Measures: Fiscal policy can be used to counteract economic cycles. During recessions, governments may engage in fiscal expansion by increasing spending and reducing taxes to boost demand. In periods of high inflation, fiscal contraction is implemented to reduce demand and control prices.
- Monitoring and Evaluation: Fiscal policies require ongoing monitoring and evaluation to ensure they are achieving their intended goals. Adjustments may be necessary based on economic conditions and changing priorities.
- Global Implications: In an interconnected global economy, fiscal policies of one country can affect other nations. Exchange rates, trade balances, and international economic stability can be influenced by a country’s fiscal policies.
In summary, fiscal policy is a fundamental tool in a government’s economic toolbox, allowing them to use taxation and spending to achieve economic stability and long-term goals while addressing both short-term cyclical fluctuations and structural challenges. It plays a crucial role in shaping the economic well-being of a nation.
MCQs on Fiscal Policy
Q1. What is fiscal policy?
a) Monetary policy
b) Government policy related to taxes and spending
c) Trade policy
d) Foreign policy
Q2. Fiscal policy can be used to:
a) Control inflation
b) Control interest rates
c) Control exchange rates
d) Control unemployment
Q3. Expansionary fiscal policy involves:
a) Increasing government spending and reducing taxes
b) Reducing government spending and increasing taxes
c) Reducing government spending and reducing taxes
d) Increasing government spending and increasing taxes
Q4. Contractionary fiscal policy involves:
a) Increasing government spending and reducing taxes
b) Reducing government spending and increasing taxes
c) Reducing government spending and reducing taxes
d) Increasing government spending and increasing taxes
Q5. The main purpose of fiscal policy is to:
a) Promote economic stability and growth
b) Control the money supply
c) Regulate international trade
d) Control inflation
Q6. Which government body is typically responsible for fiscal policy?
a) Central bank
b) Ministry of Finance
c) Stock exchange
d) Federal Reserve
Q7. A budget surplus occurs when:
a) Government spending exceeds tax revenue
b) Tax revenue exceeds government spending
c) Government spending and tax revenue are equal
d) None of the above
Q8. A budget deficit occurs when:
a) Government spending exceeds tax revenue
b) Tax revenue exceeds government spending
c) Government spending and tax revenue are equal
d) None of the above
Q9. Automatic stabilizers are:
a) Policies that require frequent adjustments
b) Mechanisms that automatically counter economic fluctuations
c) Fiscal policies that involve government intervention
d) Tax cuts that stimulate the economy
Q10. Fiscal policy can be used to combat a recession by:
a) Reducing government spending
b) Increasing taxes
c) Increasing government spending
d) Increasing interest rates
Q11. The Laffer curve illustrates the relationship between tax rates and:
a) Government debt
b) Inflation
c) Tax revenue
d) Trade deficits
Q12. A regressive tax system is one in which:
a) Tax rates increase as income increases
b) Tax rates decrease as income increases
c) Everyone pays the same amount of taxes
d) Tax rates are determined randomly
Q13. A progressive tax system is one in which:
a) Tax rates increase as income increases
b) Tax rates decrease as income increases
c) Everyone pays the same amount of taxes
d) Tax rates are determined randomly
Q14. What is the primary tool of expansionary fiscal policy?
a) Reducing government spending
b) Reducing taxes
c) Increasing government spending
d) Increasing interest rates
Q15. A budget is considered balanced when:
a) Government spending is zero
b) Tax revenue is zero
c) Government spending equals tax revenue
d) Tax revenue equals the national debt
Q16. The national debt is the accumulation of:
a) Trade deficits
b) Budget deficits
c) Budget surpluses
d) Tax revenues
Q17. Which of the following is not a component of fiscal policy?
a) Tax policy
b) Monetary policy
c) Government spending
d) Budget management
Q18. What kind of tax is G.S.T.?
(a) Direct Tax
(b) Indirect Tax
(c) Depends on the type of goods and services
(d) None of the above
Q19. Which of the following Constitution (Amendment) Act provides for Goods and Services Tax (G.S.T.)?
(a) 101st Amendment Act
(b) 102nd Amendment Act
(c) 103rd Amendment Act
(d) 104th Amendment Act
Q20. Which of the following tax is not included in the Goods and Services Tax (GST)?
(a) Excise Duty
(b) Custom Duty
(c) Value Added Tax
(d) Service Tax
Q21. Saksham project approved by Govt. of India is related to :
(a) Skill development of SC and ST population
(b) A military unit for effective disaster management
(c) A new indirect tax network
(d) Creating self confidence among ‘Divyang’ youth.
Q22. Which one of the following is not a department in the Ministry of Finance?
(a) Expenditure
(b) Revenue
(c) Banking Division
(d) Economic Affairs
Q23. Which one of the following is part of fiscal policy?
(a) Production policy
(b) Tax policy
(c) Foreign policy
(d) Interest rate policy
Q24. Economic Survey of India is related to :
(a) NITI Aayog
(b) Reserve Bank of India
(c) Ministry of Finance
(d) Finance Commission
Q25. ‘Budget’ is an instrument of
(a) monetary policy of the government
(b) commercial policy of the government
(c) fiscal policy of the government
(d) money-saving policy of the government
Q26. In which of the following countries, zero-based budgeting was first adopted?
(a) U.S.A.
(b) France
(c) India
(d) Germany
Q27. In the Union Budgets in India, which one of the following is the largest in amount?
(a) Plan expenditure
(b) Non-Plan expenditure
(c) Revenue expenditure
(d) Capital expenditure
Q28. In the Union Budget the largest item of revenue expenditure is :
(a) Defence expenditure
(b) Major Subsidies
(c) Interest Payments
(d) Grants to States
Q29. In India’s Union Budget, Fiscal deficit means :
(a) Net increase in Union Government’s borrowing from the Reserve Bank of India
(b) Difference between current expenditure and current revenue
(c) The difference between total revenue and total expenditure of the government
(d) Sum of monetized deficit and budgetary deficit
Q30. What is the effect of deficit financing on the economy?
(a) Reduction in taxes
(b) Increase in Wages
(c) Increase in money supply
(d) Decrease in money supply
Q31. Which one of the following is likely to be the most inflationary in its effects?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Q32. The Indian Parliament exercises control on the audit of the Budget through its
(a) Estimates Committee
(b) Public Accounts Committee
(c) Privileges Committee
(d) Audit Review Committee
Q33. Direct Tax Code in India is related to which of the following?
(a) Sales Tax
(b) Income Tax
(c) Excise Tax
(d) Service Tax
Q34. Tax on sale of inherited property is :
(a) Capital Gain Tax
(b) Land Tax
(c) Wealth Tax
(d) Income Tax
Q35. Which one of the following taxes is the largest source of revenue in India?
(a) Income Tax
(b) Corporate Tax
(c) Union excise duties
(d) Custom duties
Q36. Which of the following is not a tax/duty levied by the Government of India?
(a) Service Tax
(b) Education Cess
(c) Customs Duty
(d) Toll Tax
Q37. Which one of the following sets of sources of revenue belongs to the Union Government alone ?
(a) Gift tax, Holding tax
(b) Sales tax, Income tax
(c) Customs duties, Corporation tax (d) Wealth tax, Land revenue
Q38. Value Added Tax was first introduced in India in :
(a) 2007
(b) 2006
(c) 2005
(d) 2008
Q39. Income tax in India was introduced by :
(a) Sir Charles Wood
(b) Lord Macaulay
(c) James Wilson
(d) William Jones
Q40. The primary duty of the Finance Commission of India is:
(a) To give the recommendations on distribution of tax revenue between the Union and States
(b) To prepare the Union Annual Budget
(c) To advise the President on financial matters
(d) To allocate funds to various Ministries/Departments of the Union and State Government
Q41. Who among the following was the Chairman of the First Finance Commission of India?
(a) Shri Santhanam
(b) Shri K.C. Neogy
(c) Dr. Raj Mannar
(d) Shri A.K. Chanda
Fiscal policy of India
Fiscal policy in India refers to the government’s use of taxation and public spending to manage the country’s economy. India’s fiscal policy is designed to achieve various economic objectives, including economic growth, price stability, and equitable distribution of income. Here are some key aspects of fiscal policy in India:
- Budgetary Process: India’s fiscal year runs from April 1 to March 31. The government presents an annual budget, which outlines its revenue and expenditure plans for the fiscal year. The budget is presented to Parliament, and once approved, it becomes the basis for fiscal policy implementation.
- Revenue Sources: The government in India generates revenue from various sources, including income taxes, corporate taxes, goods and services tax (GST), customs duties, and non-tax sources such as dividends from public sector enterprises.
- Expenditure Categories: Government expenditure in India can be categorized into two main categories: revenue expenditure and capital expenditure. Revenue expenditure includes routine expenses like salaries and subsidies, while capital expenditure is directed towards building infrastructure and capital assets.
- Fiscal Deficit: India has faced challenges in managing fiscal deficits. A fiscal deficit occurs when the government’s expenditure exceeds its revenue. Reducing fiscal deficits has been a key focus of fiscal policy in India to ensure fiscal sustainability.
- Counter-Cyclical Measures: Like many countries, India uses fiscal policy as a tool for counter-cyclical measures. During economic downturns, the government may increase spending on infrastructure projects and social welfare programs to stimulate the economy.
- Tax Reforms: India has undergone significant tax reforms in recent years, including the introduction of the Goods and Services Tax (GST), which aims to simplify the tax structure and improve tax compliance.
- Subsidies: India provides subsidies in various sectors, including food, fuel, and fertilizers. These subsidies are intended to support vulnerable populations and promote equitable distribution of resources.
- Public Debt Management: Effective management of public debt is crucial for India’s fiscal policy. The government aims to maintain a sustainable level of debt, balancing borrowing with fiscal discipline.
- Investment in Infrastructure: India has recognized the importance of investing in infrastructure development to stimulate economic growth and improve the country’s competitiveness on the global stage.
- Social Welfare Programs: The government has implemented various social welfare programs, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Jan Dhan Yojana, to address poverty and promote social inclusion.
- Tax Compliance: Enhancing tax compliance and widening the tax base are ongoing priorities to increase revenue collection and reduce the fiscal deficit.
- Economic Reforms: India has periodically introduced economic reforms to liberalize and modernize its economy, attract foreign investment, and improve business conditions.
Fiscal policy in India is a dynamic area that evolves in response to changing economic conditions and policy priorities. It plays a critical role in achieving the nation’s economic and social development goals.
What is fiscal policy?
Fiscal policy is a government’s use of taxation and spending to influence the economy. It is a tool to achieve economic goals, stabilize the economy, and manage public finances.
How does fiscal policy differ from monetary policy?
Fiscal policy is primarily concerned with government spending and taxation, while monetary policy is managed by central banks and focuses on controlling the money supply, interest rates, and credit conditions to achieve economic goals.
What are the goals of fiscal policy?
The primary goals of fiscal policy include achieving economic stability (e.g., controlling inflation and reducing unemployment), promoting economic growth, managing government finances, and addressing long-term issues such as income inequality and public infrastructure.
What are the key tools of fiscal policy?
The main tools of fiscal policy include changes in government spending and tax rates. An expansionary fiscal policy involves increasing spending and reducing taxes to stimulate the economy, while a contractionary fiscal policy involves decreasing spending and raising taxes to slow down the economy.
Can fiscal policy be used to address long-term challenges?
Yes, fiscal policy can address both short-term economic fluctuations (cyclical issues) and long-term structural problems. Governments can invest in education, healthcare, and infrastructure to promote long-term economic growth and address issues like income inequality.